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Question 21 Not yet answered Marked out of 10.00 P Flag question Examine the spot exchange rate and interest rate quotations detailed in the flowing

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Question 21 Not yet answered Marked out of 10.00 P Flag question Examine the spot exchange rate and interest rate quotations detailed in the flowing table (APR stands for annual percentage rate): Bid Ask Lending Borrowing 3.10% APR So($/) $1.1988/ $1.2296/ is 3.00% APR ie 2.10% APR 2.00% APR 360- a) Based on the interest rate parity (IRP), what is the maximum forward bid rate Fb36 days ($/ ) that eliminates profitable covered interest arbitrage opportunities? (3 marks) b) Suppose a dealer provides the following quotations of forward exchange rates: Bid Ask F360 days ($/) $1.2465/ $1.2845/ Describe a covered interest arbitrage strategy to make a profit using a $1,000,000 loan facility. Explain in sufficient detail what action you take, which contract and what exchange rate you trade in each step. In addition, calculate how much profit can you make from executing this strategy. (7 marks) 4

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